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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
_________________________________________________________

For the quarterly period ended March 31, 2019

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
____________________________________________________________

For the transition period from           to          
Commission File No. 0-2989
 
COMMERCE BANCSHARES, INC.
 
(Exact name of registrant as specified in its charter)
Missouri
 
43-0889454
(State of Incorporation)
 
(IRS Employer Identification No.)
 
 
 
1000 Walnut,
Kansas City, MO
 
64106
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(816) 234-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company £
Emerging growth company £
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
As of May 1, 2019, the registrant had outstanding 110,507,831 shares of its $5 par value common stock, registrant’s only class of common stock.



Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q
 

 
 
 
Page
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
 
 
(In thousands)
ASSETS
 
 
 
Loans
$
14,120,722

 
$
14,140,298

  Allowance for loan losses
(160,682
)
 
(159,932
)
Net loans
13,960,040

 
13,980,366

Loans held for sale (including $8,908,000 and $13,529,000 of residential mortgage loans carried at fair value at March 31, 2019 and December 31, 2018, respectively)
20,085

 
20,694

Investment securities:
 
 
 

Available for sale debt ($312,276,000 and $463,325,000 pledged at March 31, 2019 and
 
 
 
    December 31, 2018, respectively, to secure swap and repurchase agreements)
8,627,890

 
8,538,041

Trading debt
30,427

 
27,059

Equity
4,694

 
4,409

Other
129,504

 
129,157

Total investment securities
8,792,515

 
8,698,666

Federal funds sold and short-term securities purchased under agreements to resell
250

 
3,320

Long-term securities purchased under agreements to resell
700,000

 
700,000

Interest earning deposits with banks
166,077

 
689,876

Cash and due from banks
428,018

 
507,892

Premises and equipment, net
362,679

 
333,119

Goodwill
138,921

 
138,921

Other intangible assets, net
8,511

 
8,794

Other assets
456,375

 
382,194

Total assets
$
25,033,471

 
$
25,463,842

LIABILITIES AND EQUITY
 
 
 
Deposits:
 
 
 

   Non-interest bearing
$
6,298,724

 
$
6,980,298

   Savings, interest checking and money market
11,799,346

 
11,685,239

   Certificates of deposit of less than $100,000
599,289

 
586,091

   Certificates of deposit of $100,000 and over
1,276,994

 
1,072,031

Total deposits
19,974,353

 
20,323,659

Federal funds purchased and securities sold under agreements to repurchase
1,722,751

 
1,956,389

Other borrowings
2,022

 
8,702

Other liabilities
291,132

 
237,943

Total liabilities
21,990,258

 
22,526,693

Commerce Bancshares, Inc. stockholders’ equity:
 
 
 

   Preferred stock, $1 par value
 
 
 
      Authorized 2,000,000 shares; issued 6,000 shares
144,784

 
144,784

   Common stock, $5 par value
 
 
 

 Authorized 120,000,000 shares;
 
 
 
   issued 111,886,450 shares
559,432

 
559,432

   Capital surplus
2,074,912

 
2,084,824

   Retained earnings
307,193

 
241,163

   Treasury stock of 985,029 shares at March 31, 2019
 
 
 
     and 555,100 shares at December 31, 2018, at cost
(60,547
)
 
(34,236
)
   Accumulated other comprehensive income (loss)
11,981

 
(64,669
)
Total Commerce Bancshares, Inc. stockholders' equity
3,037,755

 
2,931,298

Non-controlling interest
5,458

 
5,851

Total equity
3,043,213

 
2,937,149

Total liabilities and equity
$
25,033,471

 
$
25,463,842

See accompanying notes to consolidated financial statements.

3

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
 
For the Three Months Ended March 31
(In thousands, except per share data)
2019
2018
 
(Unaudited)
INTEREST INCOME
 
 
Interest and fees on loans
$
166,432

$
147,015

Interest and fees on loans held for sale
334

304

Interest on investment securities
55,422

53,242

Interest on federal funds sold and short-term securities purchased under
 
 
   agreements to resell
33

180

Interest on long-term securities purchased under agreements to resell
3,758

4,114

Interest on deposits with banks
1,886

1,140

Total interest income
227,865

205,995

INTEREST EXPENSE
 
 
Interest on deposits:
 
 
   Savings, interest checking and money market
9,602

5,589

   Certificates of deposit of less than $100,000
1,259

662

   Certificates of deposit of $100,000 and over
6,002

2,839

Interest on federal funds purchased and securities sold under
 
 
   agreements to repurchase
7,509

4,001

Interest on other borrowings
5

12

Total interest expense
24,377

13,103

Net interest income
203,488

192,892

Provision for loan losses
12,463

10,396

Net interest income after provision for loan losses
191,025

182,496

NON-INTEREST INCOME
 
 
Bank card transaction fees
39,644

41,453

Trust fees
37,256

36,062

Deposit account charges and other fees
23,018

22,982

Capital market fees
1,879

2,291

Consumer brokerage services
3,747

3,768

Loan fees and sales
3,309

2,862

Other
12,387

10,272

Total non-interest income
121,240

119,690

INVESTMENT SECURITIES GAINS (LOSSES), NET
(925
)
5,410

NON-INTEREST EXPENSE
 
 
Salaries and employee benefits
122,128

115,894

Net occupancy
11,501

11,584

Equipment
4,471

4,431

Supplies and communication
5,162

5,313

Data processing and software
22,260

20,690

Marketing
5,900

4,805

Deposit insurance
1,710

3,457

Community service
803

729

Other
17,490

15,374

Total non-interest expense
191,425

182,277

Income before income taxes
119,915

125,319

Less income taxes
22,860

23,258

Net income
97,055

102,061

Less non-controlling interest expense (income)
(83
)
1,077

Net income attributable to Commerce Bancshares, Inc.
97,138

100,984

Less preferred stock dividends
2,250

2,250

Net income available to common shareholders
$
94,888

$
98,734

Net income per common share — basic
$
.85

$
.88

Net income per common share — diluted
$
.85

$
.88

See accompanying notes to consolidated financial statements.

4

Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
2019
2018
 
 
(Unaudited)
Net income
 
 
$
97,055

$
102,061

Other comprehensive income (loss):
 
 
 
 
Net unrealized gains on securities for which a portion of an other-than-temporary impairment has been recorded in earnings
 
 
41

45

Net unrealized gains (losses) on other securities
 
 
73,441

(73,721
)
Pension loss amortization
 
 
389

393

Unrealized gains on cash flow hedge derivatives
 
 
2,779


Other comprehensive income (loss)
 
 
76,650

(73,283
)
Comprehensive income
 
 
173,705

28,778

Less non-controlling interest expense (income)
 
 
(83
)
1,077

Comprehensive income attributable to Commerce Bancshares, Inc.
 
$
173,788

$
27,701

See accompanying notes to consolidated financial statements.














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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
Commerce Bancshares, Inc. Shareholders
 
 
 
 

(In thousands, except per share data)
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
 
(Unaudited)
Balance December 31, 2018
$
144,784

$
559,432

$
2,084,824

$
241,163

$
(34,236
)
$
(64,669
)
$
5,851

$
2,937,149

Net income
 




97,138





(83
)
97,055

Other comprehensive income
 








76,650



76,650

Distributions to non-controlling interest
 










(310
)
(310
)
Purchases of treasury stock
 






(39,699
)




(39,699
)
Issuance of stock under purchase and equity compensation plans
 


(13,392
)


13,388





(4
)
Stock-based compensation
 


3,480









3,480

Cash dividends on common stock ($.260 per share)
 




(28,858
)






(28,858
)
Cash dividends on preferred stock ($.375 per depositary share)
 




(2,250
)






(2,250
)
Balance March 31, 2019
$
144,784

$
559,432

$
2,074,912

$
307,193

$
(60,547
)
$
11,981

$
5,458

$
3,043,213

Balance December 31, 2017
$
144,784

$
535,407

$
1,815,360

$
221,374

$
(14,473
)
$
14,108

$
1,624

$
2,718,184

Adoption of ASU 2018-02






(2,932
)


2,932




Adoption of ASU 2016-01






33,320



(33,320
)



Net income






100,984





1,077

102,061

Other comprehensive loss










(73,283
)


(73,283
)
Distributions to non-controlling interest












(95
)
(95
)
Purchases of treasury stock








(17,067
)




(17,067
)
Issuance of stock under purchase and equity compensation plans




(15,865
)


15,859





(6
)
Stock-based compensation




3,290









3,290

Cash dividends on common stock ($.224 per share)






(25,106
)






(25,106
)
Cash dividends on preferred stock ($.375 per depositary share)






(2,250
)






(2,250
)
Balance March 31, 2018
$
144,784

$
535,407

$
1,802,785

$
325,390

$
(15,681
)
$
(89,563
)
$
2,606

$
2,705,728

See accompanying notes to consolidated financial statements.



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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31
(In thousands)
2019
 
2018
 
(Unaudited)
OPERATING ACTIVITIES:
 
 
 
Net income
$
97,055

 
$
102,061

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Provision for loan losses
12,463

 
10,396

  Provision for depreciation and amortization
9,966

 
9,620

  Amortization of investment security premiums, net
9,998

 
7,233

  Investment securities (gains) losses, net (A)
925

 
(5,410
)
  Net gains on sales of loans held for sale
(1,929
)
 
(1,147
)
  Originations of loans held for sale
(46,454
)
 
(44,066
)
  Proceeds from sales of loans held for sale
48,506

 
49,255

  Net (increase) decrease in trading debt securities
4,632

 
(18,543
)
  Stock-based compensation
3,480

 
3,290

  (Increase) decrease in interest receivable
(1,568
)
 
744

  Increase (decrease) in interest payable
2,708

 
(732
)
  Increase in income taxes payable
20,479

 
22,076

  Other changes, net
(18,080
)
 
9,212

Net cash provided by operating activities
142,181

 
143,989

INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of investment securities (A)
150,756

 
148,652

Proceeds from maturities/pay downs of investment securities (A)
252,824

 
358,690

Purchases of investment securities (A)
(432,645
)
 
(298,554
)
Net decrease in loans
7,758

 
78,838

Purchases of premises and equipment
(11,283
)
 
(4,982
)
Sales of premises and equipment
1,268

 
718

Net cash provided by (used in) investing activities
(31,322
)
 
283,362

FINANCING ACTIVITIES:
 
 
 
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits
(620,589
)
 
54,986

Net increase (decrease) in certificates of deposit
218,161

 
(9,961
)
Net decrease in federal funds purchased and securities sold under agreements to repurchase
(233,638
)
 
(374,809
)
Repayment of long-term borrowings
(54
)
 
(74
)
Net increase (decrease) in short-term borrowings
(6,736
)
 
7,530

Purchases of treasury stock
(39,699
)
 
(17,067
)
Issuance of stock under equity compensation plans
(4
)
 
(6
)
Cash dividends paid on common stock
(28,858
)
 
(25,106
)
Cash dividends paid on preferred stock
(2,250
)
 
(2,250
)
Net cash used in financing activities
(713,667
)
 
(366,757
)
Increase (decrease) in cash, cash equivalents and restricted cash
(602,808
)
 
60,594

Cash, cash equivalents and restricted cash at beginning of year
1,209,240

 
524,352

Cash, cash equivalents and restricted cash at March 31
$
606,432

 
$
584,946

Income tax payments, net
$
1,350

 
$
147

Interest paid on deposits and borrowings
$
21,668

 
$
13,835

Loans transferred to foreclosed real estate
$
54

 
$
1,028

(A) Available for sale debt securities, equity securities, and other securities.
See accompanying notes to consolidated financial statements.

Restricted cash is comprised of cash collateral posted by the Company to secure interest rate swap agreements. This balance is included in other assets in the consolidated balance sheets and totaled $12.1 million and $10.2 million at March 31, 2019 and 2018, respectively.


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Table of Contents

Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019 (Unaudited)
 
1. Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2018 data to conform to current year presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Management has evaluated subsequent events for potential recognition or disclosure. The results of operations for the three month period ended March 31, 2019 are not necessarily indicative of results to be attained for the full year or any other interim period.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company's most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto.


2. Loans and Allowance for Loan Losses
Major classifications within the Company’s held for investment loan portfolio at March 31, 2019 and December 31, 2018 are as follows:

(In thousands)
 
March 31, 2019
 
December 31, 2018
Commercial:
 
 
 
 
Business
 
$
5,175,541

 
$
5,106,427

Real estate – construction and land
 
925,269

 
869,659

Real estate – business
 
2,859,614

 
2,875,788

Personal Banking:
 
 
 
 
Real estate – personal
 
2,125,087

 
2,127,083

Consumer
 
1,893,212

 
1,955,572

Revolving home equity
 
364,010

 
376,399

Consumer credit card
 
772,396

 
814,134

Overdrafts
 
5,593

 
15,236

Total loans
 
$
14,120,722

 
$
14,140,298


At March 31, 2019, loans of $3.8 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.6 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.


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Table of Contents

Allowance for loan losses    
A summary of the activity in the allowance for loan losses during the three months ended March 31, 2019 and 2018, respectively, follows:
 
 
 
For the Three Months Ended March 31
(In thousands)
 
 
Commercial
Personal Banking

Total
Balance at January 1
 
$
92,869

$
67,063

$
159,932

Provision
 
1,168

11,295

12,463

Deductions:
 
 
 
 
   Loans charged off
 
527

14,204

14,731

   Less recoveries on loans
 
133

2,885

3,018

Net loan charge-offs
 
394

11,319

11,713

Balance March 31, 2019
 
$
93,643

$
67,039

$
160,682

Balance at January 1
 
$
93,704

$
65,828

$
159,532

Provision
 
(894
)
11,290

10,396

Deductions:
 
 
 
 
   Loans charged off
 
366

13,365

13,731

   Less recoveries on loans
 
621

2,714

3,335

Net loan charge-offs (recoveries)
 
(255
)
10,651

10,396

Balance March 31, 2018
 
$
93,065

$
66,467

$
159,532


The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2019 and December 31, 2018, disaggregated on the basis of impairment methodology. Impaired loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics, which are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.
 
Impaired Loans
 
All Other Loans

(In thousands)
Allowance for Loan Losses
Loans Outstanding
 
Allowance for Loan Losses
Loans Outstanding
March 31, 2019
 
 
 
 
 
Commercial
$
1,720

$
66,739

 
$
91,923

$
8,893,685

Personal Banking
923

17,433

 
66,116

5,142,865

Total
$
2,643

$
84,172

 
$
158,039

$
14,036,550

December 31, 2018
 
 
 
 
 
Commercial
$
1,780

$
61,496

 
$
91,089

$
8,790,378

Personal Banking
916

17,120

 
66,147

5,271,304

Total
$
2,696

$
78,616

 
$
157,236

$
14,061,682


Impaired loans
The table below shows the Company’s investment in impaired loans at March 31, 2019 and December 31, 2018. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section below.
(In thousands)
 
Mar. 31, 2019
 
Dec. 31, 2018
Non-accrual loans
 
$
12,167

 
$
12,536

Restructured loans (accruing)
 
72,005

 
66,080

Total impaired loans
 
$
84,172

 
$
78,616



9

Table of Contents

The following table provides additional information about impaired loans held by the Company at March 31, 2019 and December 31, 2018, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.


(In thousands)
Recorded Investment
Unpaid Principal
Balance
 Related
Allowance
March 31, 2019
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,381

$
14,376

$

 
$
8,381

$
14,376

$

With an allowance recorded:
 
 
 
Business
$
46,736

$
46,873

$
1,241

Real estate – construction and land
414

419

11

Real estate – business
11,208

11,809

468

Real estate – personal
4,380

5,902

243

Consumer
5,365

5,365

34

Revolving home equity
39

39

1

Consumer credit card
7,649

7,649

645

 
$
75,791

$
78,056

$
2,643

Total
$
84,172

$
92,432

$
2,643

December 31, 2018
 
 
 
With no related allowance recorded:
 
 
 
Business
$
8,725

$
14,477

$

 
$
8,725

$
14,477

$

With an allowance recorded:
 
 
 
Business
$
40,286

$
40,582

$
1,223

Real estate – construction and land
416

421

11

Real estate – business
12,069

12,699

546

Real estate – personal
4,461

6,236

266

Consumer
5,510

5,510

38

Revolving home equity
40

40

1

Consumer credit card
7,109

7,109

611

 
$
69,891

$
72,597

$
2,696

Total
$
78,616

$
87,074

$
2,696



Total average impaired loans for the three month periods ended March 31, 2019 and 2018, respectively, are shown in the table below.

(In thousands)
Commercial
Personal Banking
Total
Average Impaired Loans:
 
 
 
For the three months ended March 31, 2019
 
 
 
Non-accrual loans
$
10,347

$
1,973

$
12,320

Restructured loans (accruing)
53,607

15,437

69,044

Total
$
63,954

$
17,410

$
81,364

For the three months ended March 31, 2018
 
 
 
Non-accrual loans
$
8,523

$
2,928

$
11,451

Restructured loans (accruing)
79,258

18,773

98,031

Total
$
87,781

$
21,701

$
109,482



10

Table of Contents

The table below shows interest income recognized during the three month periods ended March 31, 2019 and 2018, respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section below.
 
 
For the Three Months Ended March 31
(In thousands)
 
2019
2018
Interest income recognized on impaired loans:
 
 
 
Business
 
$
1,008

$
760

Real estate – construction and land
 
6

24

Real estate – business
 
151

113

Real estate – personal
 
35

111

Consumer
 
80

80

Revolving home equity
 
1

2

Consumer credit card
 
146

128

Total
 
$
1,427

$
1,218


Delinquent and non-accrual loans
The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at March 31, 2019 and December 31, 2018.




(In thousands)
Current or Less Than 30 Days Past Due

30 – 89
Days Past Due
90 Days Past Due and Still Accruing
Non-accrual



Total
March 31, 2019
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
5,154,124

$
12,178

$
670

$
8,569

$
5,175,541

Real estate – construction and land
924,028

1,237


4

925,269

Real estate – business
2,844,335

13,412

121

1,746

2,859,614

Personal Banking:
 
 
 
 
 
Real estate – personal
2,113,316

7,335

2,588

1,848

2,125,087

Consumer
1,866,038

24,905

2,269


1,893,212

Revolving home equity
362,373

1,167

470


364,010

Consumer credit card
751,639

10,220

10,537


772,396

Overdrafts
5,315

278



5,593

Total
$
14,021,168

$
70,732

$
16,655

$
12,167

$
14,120,722

December 31, 2018
 
 
 
 
 
Commercial:
 
 
 
 
 
Business
$
5,086,912

$
10,057

$
473

$
8,985

$
5,106,427

Real estate – construction and land
867,692

1,963


4

869,659

Real estate – business
2,867,347

6,704

22

1,715

2,875,788

Personal Banking:
 
 
 
 
 
Real estate – personal
2,118,045

6,041

1,165

1,832

2,127,083

Consumer
1,916,320

35,608

3,644


1,955,572

Revolving home equity
374,830

875

694


376,399

Consumer credit card
792,334

11,140

10,660


814,134

Overdrafts
14,937

299



15,236

Total
$
14,038,417

$
72,687

$
16,658

$
12,536

$
14,140,298


Credit quality
The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a

11

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transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.
Commercial Loans


(In thousands)


Business
Real
 Estate-Construction
Real
Estate-
Business


Total
March 31, 2019
 
 
 
 
Pass
$
4,954,297

$
876,805

$
2,761,215

$
8,592,317

Special mention
119,582

47,397

49,151

216,130

Substandard
93,093

1,063

47,502

141,658

Non-accrual
8,569

4

1,746

10,319

Total
$
5,175,541

$
925,269

$
2,859,614

$
8,960,424

December 31, 2018
 
 
 
 
Pass
$
4,915,042

$
866,527

$
2,777,374

$
8,558,943

Special mention
84,391

1,917

51,845

138,153

Substandard
98,009

1,211

44,854

144,074

Non-accrual
8,985

4

1,715

10,704

Total
$
5,106,427

$
869,659

$
2,875,788

$
8,851,874


The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above section on "Delinquent and non-accrual loans". In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain personal real estate loans for which FICO scores are not obtained because the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $196.4 million at March 31, 2019 and $201.7 million at December 31, 2018. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $167.2 million at March 31, 2019 and $170.3 million at December 31, 2018. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. The personal real estate loans and consumer loans excluded below totaled less than 8% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at March 31, 2019 and December 31, 2018 by FICO score.
   Personal Banking Loans
 
% of Loan Category
 
Real Estate - Personal
Consumer
Revolving Home Equity
Consumer Credit Card
March 31, 2019
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.1
%
3.4
%
1.2
%
5.4
%
600 - 659
1.7

5.3

1.9

14.0

660 - 719
9.9

18.0

9.5

35.6

720 - 779
25.3

24.3

22.8

26.3

780 and over
62.0

49.0

64.6

18.7

Total
100.0
%
100.0
%
100.0
%
100.0
%
December 31, 2018
 
 
 
 
FICO score:
 
 
 
 
Under 600
1.1
%
3.1
%
0.8
%
4.4
%
600 - 659
1.8

4.8

1.7

14.0

660 - 719
9.4

16.1

9.1

34.8

720 - 779
24.7

25.7

24.0

26.4

780 and over
63.0

50.3

64.4

20.4

Total
100.0
%
100.0
%
100.0
%
100.0
%



12

Table of Contents

Troubled debt restructurings
As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings, as shown in the table below. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard, but renewed at rates judged to be non- market. These loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified as consumer bankruptcy certain personal real estate, revolving home equity, and consumer loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.
(In thousands)
March 31, 2019
December 31, 2018
Accruing restructured loans:
 
 
 
Commercial
$
56,524

$
50,904

 
Assistance programs
7,960

7,410

 
Consumer bankruptcy
3,946

4,103

 
Other consumer
3,575

3,663

Non-accrual loans
9,352

9,759

Total troubled debt restructurings
$
81,357

$
75,839


The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2019, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.
(In thousands)
March 31, 2019
Balance 90 days past due at any time during previous 12 months
Commercial:
 
 
Business
$
54,928

$

Real estate - construction and land
411


Real estate - business
9,462


Personal Banking:
 
 
Real estate - personal
3,503

217

Consumer
5,365

47

Revolving home equity
39


Consumer credit card
7,649

685

Total troubled debt restructurings
$
81,357

$
949


For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.0 million on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans having no other concessions granted other than being renewed at

13

Table of Contents

non-market interest rates are judged to have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of $2.7 million at March 31, 2019 to lend additional funds to borrowers with restructured loans.

Loans held for sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 11. The loans are primarily sold to FNMA, FHLMC, and GNMA. At March 31, 2019, the fair value of these loans was $8.9 million, and the unpaid principal balance was $8.5 million.

The Company also designates certain student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at March 31, 2019 totaled $11.2 million.

At March 31, 2019, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.
 
Foreclosed real estate/repossessed assets
The Company’s holdings of foreclosed real estate totaled $737 thousand and $1.4 million at March 31, 2019 and December 31, 2018, respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $2.6 million and $2.0 million at March 31, 2019 and December 31, 2018, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.

3. Investment Securities
Investment securities consisted of the following at March 31, 2019 and December 31, 2018.
 
(In thousands)
March 31, 2019
December 31, 2018
Available for sale debt securities
$
8,627,890

$
8,538,041

Trading debt securities
30,427

27,059

Equity securities:
 
 
   Readily determinable fair value
2,808

2,585

   No readily determinable fair value
1,886

1,824

Other:


 
   Federal Reserve Bank stock
33,627

33,498

   Federal Home Loan Bank stock
10,000

10,000

   Private equity investments
85,877

85,659

Total investment securities
$
8,792,515

$
8,698,666


The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.
Other investment securities include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB

14

Table of Contents

stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.
The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of March 31, 2019 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.
(In thousands)
Amortized Cost
Fair Value
U.S. government and federal agency obligations:
 
 
Within 1 year
$
29,484

$
29,341

After 1 but within 5 years
588,651

597,792

After 5 but within 10 years
249,143

250,788

Total U.S. government and federal agency obligations
867,278

877,921

Government-sponsored enterprise obligations:
 
 
Within 1 year
36,442

36,176

After 1 but within 5 years
85,155

84,759

After 5 but within 10 years
34,986

34,974

After 10 years
42,913

42,070

Total government-sponsored enterprise obligations
199,496

197,979

State and municipal obligations:
 
 
Within 1 year
87,817

88,067

After 1 but within 5 years
663,990

675,122

After 5 but within 10 years
440,363

454,085

After 10 years
56,231

56,926

Total state and municipal obligations
1,248,401

1,274,200

Mortgage and asset-backed securities:
 
 
  Agency mortgage-backed securities
3,416,497

3,412,399

  Non-agency mortgage-backed securities
1,056,738

1,060,008

  Asset-backed securities
1,470,541

1,470,516

Total mortgage and asset-backed securities
5,943,776

5,942,923

Other debt securities:
 
 
Within 1 year
22,497

22,412

After 1 but within 5 years
245,030

244,892

After 5 but within 10 years
67,995

67,563

Total other debt securities
335,522

334,867

Total available for sale debt securities
$
8,594,473

$
8,627,890


Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $446.9 million, at fair value, at March 31, 2019. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $14.5 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates.


15

Table of Contents

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in AOCI, by security type.
 
 
(In thousands)
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
March 31, 2019
 
 
 
 
U.S. government and federal agency obligations
$
867,278

$
11,844

$
(1,201
)
$
877,921

Government-sponsored enterprise obligations
199,496

258

(1,775
)
197,979

State and municipal obligations
1,248,401

26,485

(686
)
1,274,200

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,416,497

19,977

(24,075
)
3,412,399

  Non-agency mortgage-backed securities
1,056,738

9,833

(6,563
)
1,060,008

  Asset-backed securities
1,470,541

5,536

(5,561
)
1,470,516

Total mortgage and asset-backed securities
5,943,776

35,346

(36,199
)
5,942,923

Other debt securities
335,522

645

(1,300
)
334,867

Total
$
8,594,473

$
74,578

$
(41,161
)
$
8,627,890

December 31, 2018
 
 
 
 
U.S. government and federal agency obligations
$
914,486

$
4,545

$
(11,379
)
$
907,652

Government-sponsored enterprise obligations
199,470

55

(3,747
)
195,778

State and municipal obligations
1,322,785

10,284

(5,030
)
1,328,039

Mortgage and asset-backed securities:
 
 
 
 
  Agency mortgage-backed securities
3,253,433

9,820

(48,268
)
3,214,985

  Non-agency mortgage-backed securities
1,053,854

6,641

(12,779
)
1,047,716

  Asset-backed securities
1,518,976

3,849

(11,211
)
1,511,614

Total mortgage and asset-backed securities
5,826,263

20,310

(72,258
)
5,774,315

Other debt securities
339,595

72

(7,410
)
332,257

Total
$
8,602,599

$
35,266

$
(99,824
)
$
8,538,041


The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At March 31, 2019, the fair value of securities on this watch list was $55.0 million compared to $57.7 million at December 31, 2018.

As of March 31, 2019, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities with a current par value of $22.2 million. These securities, which are part of the watch list mentioned above, had an aggregate fair value of $17.3 million at March 31, 2019. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at March 31, 2019 included the following:

Significant Inputs
Range
Prepayment CPR
0%
-
37%
Projected cumulative default
8%
-
50%
Credit support
0%
-
20%
Loss severity
11%
-
63%


16

Table of Contents

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.
 
For the Three Months Ended March 31
(In thousands)
2019
2018
Cumulative OTTI credit losses at January 1
$
14,092

$
14,199

Credit losses on debt securities for which impairment was not previously recognized

58

Credit losses on debt securities for which impairment was previously recognized

10

Increase in expected cash flows that are recognized over remaining life of security
(33
)
(54
)
Cumulative OTTI credit losses at March 31
$
14,059

$
14,213


Debt securities with unrealized losses recorded in AOCI are shown in the table below, along with the length of the impairment period.
 
Less than 12 months
 
12 months or longer
 
Total
 
(In thousands)
   Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
 
Fair Value
Unrealized
Losses
March 31, 2019
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
3,200

$
26

 
$
114,835

$
1,175

 
$
118,035

$
1,201

Government-sponsored enterprise obligations
34,974

12

 
139,959

1,763

 
174,933

1,775

State and municipal obligations
13,907

3

 
110,737

683

 
124,644

686

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
156,031

326

 
1,706,133

23,749

 
1,862,164

24,075

   Non-agency mortgage-backed securities
47,338

41

 
639,311

6,522

 
686,649

6,563

   Asset-backed securities
219,611

931

 
726,118

4,630

 
945,729

5,561

Total mortgage and asset-backed securities
422,980

1,298

 
3,071,562

34,901

 
3,494,542

36,199

Other debt securities
35,967

32

 
170,424

1,268

 
206,391

1,300

Total
$
511,028

$
1,371

 
$
3,607,517

$
39,790

 
$
4,118,545

$
41,161

December 31, 2018
 
 
 
 
 
 
 
 
U.S. government and federal agency obligations
$
317,699

$
6,515

 
$
116,728

$
4,864

 
$
434,427

$
11,379

Government-sponsored enterprise obligations


 
188,846

3,747

 
188,846

3,747

State and municipal obligations
157,838

704

 
257,051

4,326

 
414,889

5,030

Mortgage and asset-backed securities:
 
 
 
 
 
 
 
 
   Agency mortgage-backed securities
330,933

1,502

 
1,927,268

46,766

 
2,258,201

48,268

   Non-agency mortgage-backed securities
207,506

1,085

 
657,685

11,694

 
865,191

12,779

   Asset-backed securities
147,997

728

 
813,427

10,483

 
961,424

11,211

Total mortgage and asset-backed securities
686,436

3,315

 
3,398,380

68,943

 
4,084,816

72,258

Other debt securities
51,836

564

 
260,682

6,846

 
312,518

7,410

Total
$
1,213,809

$
11,098

 
$
4,221,687

$
88,726

 
$
5,435,496

$
99,824


The available for sale debt portfolio included $4.1 billion of securities that were in a loss position at March 31, 2019, compared to $5.4 billion at December 31, 2018.  The total amount of unrealized loss on these securities was $41.2 million at March 31, 2019, a decrease of $58.7 million compared to the loss at December 31, 2018.  This decrease in losses was mainly due to a declining interest rate environment at March 31, 2019. 

    

17

Table of Contents

The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.
 
For the Three Months Ended March 31
(In thousands)
2019
2018
Proceeds from sales of securities:
 
 
Available for sale debt securities
$
150,756

$
148,637

Equity securities

15

Total proceeds
$
150,756

$
148,652

 
 
 
Investment securities gains (losses), net:
 
 
Available for sale debt securities:
 
 
Gains realized on sales
$
1,386

$
212

Losses realized on sales
(692
)

Other-than-temporary impairment recognized on debt securities

(68
)
Equity securities:
 
 
Gains realized on sales

14

 Fair value adjustments, net
223

947

Other:
 
 
Fair value adjustments, net
(1,842
)
4,305

Total investment securities gains (losses), net
$
(925
)
$
5,410


Net gains and losses on investment securities for the three months ended March 31, 2019 included losses in fair value of $1.8 million on private equity investments, gains of $223 thousand on equity securities, and net gains of $694 thousand realized on sales of available for sale securities.

At March 31, 2019, securities totaling $4.0 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $312.3 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.

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Table of Contents

4. Goodwill and Other Intangible Assets
The following table presents information about the Company's intangible assets which have estimable useful lives.
 
March 31, 2019
 
December 31, 2018
 
 
(In thousands)
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
 
Gross Carrying Amount
Accumulated Amortization
Valuation Allowance
Net Amount
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
Core deposit premium
$
31,270

$
(29,100
)
$

$
2,170

 
$
31,270

$
(28,954
)
$

$
2,316

Mortgage servicing rights
10,658

(4,057
)
(260
)
6,341

 
10,339

(3,861
)

6,478

Total
$
41,928

$
(33,157
)
$
(260
)
$
8,511

 
$
41,609

$
(32,815
)
$

$
8,794


Aggregate amortization expense on intangible assets was $342 thousand and $321 thousand for the three month periods ended March 31, 2019 and 2018, respectively. The following table shows the estimated annual amortization expense for the next five fiscal years. This expense is based on existing asset balances and the interest rate environment as of March 31, 2019. The Company’s actual amortization expense in any given period may be different from the estimated amounts depending upon the acquisition of intangible assets, changes in mortgage interest rates, prepayment rates and other market conditions.
 (In thousands)
 
2019
$
1,381

2020
1,215

2021
1,032

2022
882

2023
736


Changes in the carrying amount of goodwill and net other intangible assets for the three month period ended March 31, 2019 are as follows:
(In thousands)
Goodwill
Core Deposit Premium
Mortgage Servicing Rights
Balance January 1, 2019
$
138,921

$
2,316

$
6,478

Originations


319

Amortization

(146
)
(196
)
Impairment


(260
)
Balance March 31, 2019
$
138,921

$
2,170

$
6,341


Goodwill allocated to the Company’s operating segments at March 31, 2019 and December 31, 2018 is shown below.
(In thousands)
 
Consumer segment
$
70,721

Commercial segment
67,454

Wealth segment
746

Total goodwill
$
138,921


5. Guarantees
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company generally to guarantee the payment or performance obligation of a customer to a third party. While these represent a potential outlay by the Company, a significant amount of the commitments may expire without being drawn upon. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by the Company. Most of the standby letters of credit are secured, and in the event of nonperformance by customers, the Company has rights to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.

Upon issuance of standby letters of credit, the Company recognizes a liability for the fair value of the obligation undertaken, which is estimated to be equivalent to the amount of fees received from the customer over the life of the agreement. At March 31, 2019, that net liability was $2.2 million, which will be accreted into income over the remaining life of the respective commitments. The contractual amount of these letters of credit, which represents the maximum potential future payments guaranteed by the Company, was $325.6 million at March 31, 2019.

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Table of Contents


The Company periodically enters into credit risk participation agreements (RPAs) as a guarantor to other financial institutions, in order to mitigate those institutions’ credit risk associated with interest rate swaps with third parties. The RPA stipulates that, in the event of default by the third party on the interest rate swap, the Company will reimburse a portion of the loss borne by the financial institution. These interest rate swaps are normally collateralized (generally with real property, inventories and equipment) by the third party, which limits the credit risk associated with the Company’s RPAs. The third parties usually have other borrowing relationships with the Company. The Company monitors overall borrower collateral and at March 31, 2019, believes sufficient collateral is available to cover potential swap losses. The RPAs are carried at fair value throughout their term with all changes in fair value, including those due to a change in the third party’s creditworthiness, recorded in current earnings. The terms of the RPAs, which correspond to the terms of the underlying swaps, range from 2 to 11 years. At March 31, 2019, the fair value of the Company's guarantee liabilities for RPAs was $110 thousand, and the notional amount of the underlying swaps was $86.6 million. The maximum potential future payment guaranteed by the Company cannot be readily estimated but is dependent upon the fair value of the interest rate swaps at the time of default.

6. Leases
The Company adopted ASU 2016-02, "Leases", and its related amendments on January 1, 2019 using a modified retrospective approach. The Company's leasing activities include leasing certain real estate and equipment, providing lease financing to commercial customers, and leasing office space to third parties. The Company adopted the package of practical expedients permitted within the new standard, along with the lease component expedient for all lease classes and the disclosure expedient. The Company uses the FHLB fixed-advance rate at lease commencement or remeasurement event based on the remaining lease term to calculate the liability for each lease.

Lessee
The Company primarily has operating leases for branches, office space, ATM locations, and certain equipment. As of March 31, 2019, the right-of-use asset, reported within premises and equipment, net, and lease liability, reported within other liabilities, recognized on the Company's consolidated balance sheets totaled $27.1 million and $27.8 million, respectively. For leases with a term of 12 months or less, an election was made not to recognize lease assets and lease liabilities for all asset classes, and to recognize lease expense for these leases on a straight-line basis over the lease term. Total lease cost for the three months ended March 31, 2019 was $1.8 million. The Company's leases have remaining terms of 1 year to 35 years, most of which contain renewal options. However, the renewal options are generally not included in the leased asset or liability because exercising the options are uncertain.

The maturities of operating leases are included in the table below.
(in thousands)
Operating Leases(a)
2019 (excluding the three months ended March 31, 2019)
$
4,279

2020
5,034

2021
4,203

2022
3,725

2023
3,406

After 2023
14,878

Total lease payments
$
35,525

Less: Interest(b)
7,719

Present value of lease liabilities
$
27,806

(a) Excludes $2.1 million of legally binding minimum lease payments for operating leases signed but not yet commenced.
(b) Calculated using the interest rate for each lease.

The following table presents the average lease term and discount rate of operating leases.
 
March 31, 2019
Weighted-average remaining lease term
12.1 years

Weighted-average discount rate
3.76
%


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Supplemental cash flow information related to operating leases is included in the table below.
 
For the Three Months Ended March 31
(in thousands)
2019
Operating cash paid toward lease liabilities
$
1,491

Leased assets obtained in exchange for new lease liabilities
$
1,022


The Company adopted the new lease standard using the effective date as the date of initial application as noted above, and as required, the table below provides the disclosure for periods prior to adoption. Future minimum lease payments as of December 31, 2018 are shown below, which include leases that have not yet commenced.
(in thousands)
 
Year Ended December 31
Total
2019
$
5,763

2020
4,817

2021
4,055

2022
3,598

2023
3,273

After
15,161

Total minimum lease payments
$
36,667


Lessor
The Company has net investments in direct financing and sales-type leases to commercial, industrial, and tax-exempt entities. These leases are included within business loans on the Company's consolidated balance sheets. The Company primarily leases various types of equipment, trucks and trailers, and office furniture and fixtures. Lease agreements may include options to renew or for the lessee to purchase the leased equipment at the end of the lease term. The Company has elected to adopt the lease component expedient in which the lease and nonlease components are combined into the total lease receivable. The Company also leases office space in buildings owned by the Company to third parties and are classified as operating leases. The leases may include options to expand the leased space or renew the lease, and currently the leases have remaining terms of 1 year to 9 years.

The following table provides the components of lease income.
 
For the Three Months Ended March 31
(in thousands)
2019
Direct financing and sales-type leases
5,862

Operating leases(a)
1,906

Total lease income
$
7,768

    (a) Includes rent of $19 thousand from Tower Properties Company, a related party.

The following table presents the components of the net investments in direct financing and sales-type leases.
(in thousands)
March 31, 2019
Lease payment receivable
$
716,103

Unguaranteed residual assets
49,347

Total net investments in direct financing and sales-type leases
$
765,450

Deferred origination cost
3,071

Total net investment included within business loans
$
768,521



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The maturities of lease receivables are included in the table below.
(in thousands)
Direct Financing and Sale-Type Leases
Operating Leases
Total
2019 (excluding the three months ended March 31, 2019)
$
164,086